Fiserv, Inc. — Q1 2012 Form 10-Q Summary
Business context and reporting period
Fiserv is a global financial-services technology provider serving approximately 16,000 clients, primarily through recurring account- and transaction-based contracts. Its principal segments are Payments and Financial Institution Services, with Corporate and Other including unallocated costs, acquisition-related amortization and eliminations. This unaudited filing covers the three months ended March 31, 2012, compared with the same period in 2011.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $1,108 million | $1,048 million | Up 6% |
| Processing and services revenue | $909 million | $862 million | Up 5% |
| Product revenue | $199 million | $186 million | Up 7% |
| Operating income | $241 million | $221 million | Up 9% |
| Operating margin | 21.8% | 21.1% | Up 70 basis points |
| Income from continuing operations | $133 million | $114 million | Up 17% |
| Net income | $132 million | $112 million | Up 18% |
| Diluted EPS from continuing operations | $0.95 | $0.77 | Up 23% |
| Diluted EPS | $0.94 | $0.76 | Up 24% |
| Cash flow from operations | $236 million | $283 million | Down 17% |
| Capital expenditures | $58 million | $56 million | Up 4% |
Interest expense declined to $43 million from $45 million. The effective tax rate was 34.1%, compared with 36.3% in the prior-year quarter. Acquisition-related intangible amortization reduced diluted continuing-operations EPS by $0.18 in Q1 2012, versus $0.16 in Q1 2011.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $311 million at March 31, 2012, compared with $337 million at December 31, 2011.
- Total debt, including current maturities, was approximately $3.4 billion; estimated fair value was $3.5 billion.
- The company had $1.0 billion of revolving credit capacity, no borrowings under the facility and $20 million of letters of credit outstanding. The facility expires in September 2014.
- A $1.1 billion senior term loan matures in November 2012. The company classified $925 million as long-term because it intended to refinance the amount and had access to the revolving facility.
- The company repurchased approximately $245 million of common stock during the quarter, including 3.75 million shares under announced programs. Approximately 11 million shares remained authorized for repurchase at March 31, 2012.
- Operating cash flow was sufficient to fund capital expenditures, but financing activities used $204 million, primarily because of treasury-stock purchases.
Material changes versus the prior comparable period
- Payments revenue increased 7% to $619 million, while Financial revenue increased 4% to $501 million.
- Payments operating margin declined to 26.0% from 26.8%, primarily because of investment in new products and services and higher postage pass-through costs.
- Financial operating margin improved to 30.2% from 28.9%, reflecting revenue growth, scale efficiencies and higher-margin contract termination fees.
- Revenue from acquired businesses contributed $16 million, primarily from CashEdge, which was acquired in September 2011 for approximately $460 million, net of cash acquired.
- Operating cash flow declined by $47 million, primarily because of higher income-tax payments and discretionary employee compensation payments.
- Average diluted shares declined to 140.5 million from 147.7 million, reflecting share repurchases.
Guidance, outlook, commentary and risks
Management expected the full-year 2012 effective tax rate to be approximately 36%. The filing did not provide explicit full-year revenue or EPS guidance. Management expected a greater proportion of annual revenue and earnings to occur in the second half of the year because financial-institution clients often finalize discretionary technology spending later in the year.
Management identified growth opportunities in digital channels, mobile banking, person-to-person payments, account processing and outsourced technology solutions. It also noted continuing caution in financial-institution technology spending and potential effects from industry consolidation, bank failures, contract termination fees and Dodd-Frank-related regulation.
- Key risks include economic weakness, reduced client spending, regulatory and legislative changes, privacy compliance, competition, pricing pressure, changing client demand and execution of strategic initiatives.
- Successful integration of acquisitions, including CashEdge, remains an operating consideration.
- Interest-rate exposure is managed through swaps with $1.0 billion of notional value and forward-starting swaps with $550 million of notional value. The company estimated approximately $30 million of hedge-related interest expense would be recognized over the following twelve months.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect on the financial statements.
- Management concluded that disclosure controls were effective as of March 31, 2012, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the $925 million term loan was refinanced or otherwise addressed before its November 2012 maturity.
- The sustainability of the 6% revenue growth and the contribution from CashEdge and other acquisitions.
- Whether Payments segment margin pressure from product investment and postage pass-through costs persists.
- Whether the decline in operating cash flow was temporary or reflects recurring working-capital requirements.
- The effect of continued share repurchases on leverage, liquidity and per-share earnings.
- Actual full-year tax rate, revenue and EPS outcomes relative to management’s stated outlook and the anticipated second-half weighting.